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Horizontal Integration



Definition

Horizontal Integration is a business strategy where a company acquires, merges with or takes over another company in the same industry and at the same stage of production. This strategy is used to increase market share, reduce competition, or achieve economies of scale. The result is a more consolidated and potentially larger business entity.

Phonetic

The phonetics of the keyword “Horizontal Integration” is: /ˌhɔːr.ɪ.zɒn.təl ˌɪn.tɪˈɡreɪ.ʃn/

Key Takeaways

  1. Expansion of Business: Horizontal integration represents a type of strategy where a company acquires or merges with its competitors. This leads to business expansion, increased market share, and reduction in competition.
  2. Increased Market Power: By merging with or acquiring firms in the same industry, businesses can achieve greater economies of scale, increase their customer base, leverage collective pricing, and improved bargaining power with suppliers and distribution channels.
  3. Limitations and Risks: While there are several potential advantages, horizontal integration also carries risk. Businesses can end up with higher levels of debt due to funding acquisitions. The process can also lead to legal and regulatory issues related to competition law, and potential organizational challenges due to cultural and operational differences.

Importance

Horizontal integration is a critical business and finance strategy because it allows companies to expand their reach, reduce competition, and achieve significant growth. This term refers to the acquisition or merger of companies at the same stage of production in a specific industry, often a direct competitor. Through horizontal integration, businesses enhance their market share and economies of scale, resulting in increased operational efficiency and profitability. Additionally, this strategy also ensures greater control over the supply chain, improves product diversification, and fosters robust development, making it a crucial aspect of business growth and sustainability.

Explanation

Horizontal integration is a strategic move that companies employ to expand their influence and increase their market share. Essentially, corporations use horizontal integration as a growth strategy. The primary purpose is to a secure a more substantial customer base, effectively eliminate competition, gain economies of scale, diversify product offerings, and expand into new markets. Companies either acquire or merge with their competitors or businesses operating at the same level in the supply chain, hence creating a more consolidated and robust entity.Horizontal integration aids in achieving synergy, which enhances operational efficiency and boosts profitability. This growth strategy also provides a stronghold to handle competitive threats better and exercise more control over the market. With diverse product offerings, companies can cross-sell products to their long-standing, loyal customers. It enables larger companies to remain competitive and smaller companies to cope with market threats. Thus, horizontal integration is highly beneficial in creating a stable and dominant presence in the market.

Examples

1. Walt Disney Company’s Acquisition of 21st Century Fox: In March 2019, The Walt Disney Company acquired 21st Century Fox in a horizontal integration effort, significantly expanding its content and media offerings, especially in terms of entertainment and film production. 2. Facebook’s Acquisition of Instagram & WhatsApp: One of the most well-known examples of horizontal integration is Facebook’s acquisition of Instagram and WhatsApp. By integrating these platforms into its own service, Facebook was able to remove competition and extend its reach within the social media landscape.3. Exxon-Mobile Merger: In 1999, Exxon, one of the largest oil companies, merged with Mobile, a major rival, to form Exxon Mobile. Both companies were in the same industry and at the same level of the supply chain, creating one of the world’s largest publicly traded oil and gas companies due to this horizontal integration.

Frequently Asked Questions(FAQ)

What is Horizontal Integration?

Horizontal Integration is a business strategy where a company acquires, merges with, or takes over another company in the same industry and at the same stage of production. This strategy is often used to increase scale, diversify product offerings, achieve economies of scale or improve competitiveness.

Why do companies choose Horizontal Integration?

Companies choose horizontal integration for several reasons, such as market consolidation, sales increase, business expansion, and reduction of competition. This strategy can also lead to economies of scale and cost savings due to the increased scale of operations.

What is an example of Horizontal Integration?

A classic example of horizontal integration is when Facebook purchased Instagram. Both companies operated within the same social media industry, and by purchasing Instagram, Facebook eliminated a competitor and gained access to Instagram’s user base and unique features.

Is Horizontal Integration different from Vertical Integration?

Yes, they are different. Horizontal Integration involves combining firms that operate at the same level of the supply chain, while Vertical Integration refers to combining firms at different stages of the same supply chain.

What are potential downsides of Horizontal Integration?

Some potential downsides of horizontal integration include regulatory scrutiny due to monopoly concerns, challenges in merging different organizational cultures, potential job losses due to redundancy, and high costs related to acquisition or mergers.

How does Horizontal Integration affect competition?

By its design, Horizontal Integration often decreases competition as the acquiring company can eliminate a competitor from the market. However, the practice could face opposition from regulatory bodies if it leads to unfair monopolistic power.

Are there any legal considerations for Horizontal Integration?

Yes, companies pursuing horizontal integration must consider competition laws. Regulators scrutinize these mergers to prevent formation of monopolies that can decrease competition and negatively affect consumers.

What factors should a company consider before pursuing Horizontal Integration?

Before pursuing horizontal integration, a company should thoroughly assess the target’s financial health, cultural compatibility, potential cost savings, growth potential, and the strategic fit between the two companies.

Related Finance Terms

Sources for More Information


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